Answered Essay: Financial ratio are just numbers, they do not tell you what is really going on in an organization."

“Financial ratio are just numbers, they do not tell you what is really going on in an organization.” How would you respond to this statement? Please discuss

Expert Answer

 

Financial ratios are not just mere numbers as they are used in evaluation of overall financial condition of an entity. They provide realtionship between signficant numbers such as operating expenses to revenue, assets to turnover which helps the organisation to evaluate the performance and also these ratios can be used to compare current performance with previous year’s performance.Such comparison also helps the organisation to analyse the deviations from standard performance and take better decisions.

Following are some ratios which depict the performance of the entity:
1. Gross Margin Ratio = Gross profit/Net sales
2. Operating Margin = Operating Income/Net sales
3. Return on equity = Net income/Shareholders equity
4. Return on Assets = Net income/Total Assets
5. Current Ratio = Current Assets/Current Liabilities

In addition the banks and financial institutions in order to provide loan facilities evaluate the performance of the company based on the financial ratios.

Hence, from the above we can conclude that financial ratios provide details about whats going in the organisation and are not just mere numbers.

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